This blog post examines why market prices cannot fully capture social value due to externalities and the limitations of payment capacity, and discusses how these distortions impact modern society’s norms and resource allocation.
Classical economists advocated an objective theory of value, asserting that prices are determined by the amount of labor expended in producing goods. This theory was built upon the prevailing value norms of the era, which emphasized the dignity of labor and productive activity. Today, however, subjective value theory has become dominant, locating the core of value in the satisfaction of consumer needs and emphasizing individual judgments about a good’s usefulness. It focuses on the phenomenon where, through the market, information about the needs of demanders and the costs of suppliers is expressed as prices, and market participants use these as signals to make decisions, thereby satisfying individual needs and efficiently allocating resources.
Yet resource allocation via the price mechanism has limitations. Market transactions involve externalities—benefits and costs to third parties beyond the two transacting parties. Furthermore, those unable to afford the price demanded by suppliers are excluded from the market. Beyond these market failures, as market power grows, prices diverge from normative values, negatively impacting those norms. If speculative activities command high prices, people become less averse to earning money without productive contribution, and virtues that lack a price tag may be perceived as worthless. The growing global interest in social value around the time of the U.S.-originated financial crisis can be understood within this context. However, differing perspectives exist regarding social value. From a sociological perspective, value is understood as what is ultimately desirable in human life, emphasizing value as a norm. This viewpoint defines social phenomena requiring correction as social problems when viewed against value norms such as fairness, equality, quality of life, and sustainability. It sees social value as achieving outcomes deemed desirable by the majority through resolving these problems. Conversely, the economic perspective focuses on market failures. It views social value as comprising two types of benefits: those where someone’s needs were met due to externalities but the costs were not recovered, and those where benefits could not be fulfilled through existing markets due to insufficient payment capacity.
Recently, efforts to promote social problem-solving, correct market failures, and enhance the efficiency of resource allocation have centered around the concept of social impact. This concept aims to measure the social value created by a company, corresponding to its financial performance—the economic outcome of its activities. Social impact reflects a sociological perspective in its focus on solving social problems, while also incorporating an economic viewpoint by emphasizing benefits not reflected in market pricing mechanisms or unrecovered costs, and by highlighting outcomes and incentives measurable in monetary terms.
A specific method for measuring social impact involves creating accounts for each stakeholder who receives benefits from or bears the costs of corporate activities, recording their respective benefits and costs, and then aggregating them. According to this approach, support funds provided by governments, public foundations, citizens, etc., to various economic activity organizations solving social problems cover these organizations’ costs. Therefore, these funds are treated as costs in the relevant stakeholder accounts and deducted from the social impact calculation. Let’s examine how social performance is measured for social enterprises, one type of organization actively creating social value.
If a social enterprise hires vulnerable individuals, providing them with $1,500 in labor income and receiving $500 in employment subsidies from the government, a benefit of $1,500 first accrues to the vulnerable individuals’ account. This represents the effect of improved quality of life for the workers. Next, since the government pays the $500 subsidy, a cost of $500 is recorded in the government account. The social outcome here is the net benefit, calculated by summing the costs and benefits across both stakeholders, yielding a measured value of $1,000.
Measuring the actual benefits and costs associated with social problem-solving activities presents significant limitations. However, if these benefits are converted into monetary units, and monetary compensation—social impact compensation—is activated through various means to cover the portion not recovered by existing stakeholders based on evaluations of monetized outcomes, activities achieving social value will be formally priced. This process will attract more capital to corporations and nonprofit organizations, motivate them to achieve higher performance through efficient management, and realign prices with societal value norms. This trend is already materializing today through social contribution bonds and impact investing.
